One set of researchers found that for married couple, having the lower-income spouse start benefits at age 62 and for the higher income spouse to defer benefits to age 70.    The lower income spouse should start as early as possible because their “penalty” for starting early disappears when the higher income spouse dies (the lower income earner can then collect the deceased’s benefits).

Another little know tactic is the “file and suspend” provision.  This allows the higher income earning spouse to file for benefits at his full retirement age yet suspend the actual collection of benefits until later. The suspension of collecting benefits allows the benefit to grow through age 70.  Yet, as soon as the higher income spouse files, the lower income spouse may start collecting benefits at 50% of the higher income earner’s rate.

If your situation changes after you begin benefits, you can exercise the little know “do-over” provision.  In such a case, you pay back all of the social security benefits you have received (without interest!).  You can then re-file when you want your benefits to start thereby allowing you or a spouse to collect more.  If you have no problem sending the government a large check, you may want to start your benefits at age 62 knowing that you can always exercise the do-over provisi0on and reverse your earlier filing.

You can use this limited information above to tell if your retirement advisor is any good.  Most financial advisors know little about social security because there’s nothing for them to “sell.”  Knowledge of social security won’t make then any commissions.  However, more competent fee-based retirement planners will charge a fee for their time in analyzing your social security options and help you maximize the decisions and get thousands more in your pocket.

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There are two main types of reverse mortgages available to the public: federally insured reverse mortgages backed by HUD, and retail reverse mortgages backed by corporate lenders.  These mortgage products quite simply are designed to pay out a portion of your home’s equity in cash.  This will either take the form of a single, lump-sum payment, a set monthly payment (that continues either for a set period of time or for as long as you own your home) or most commonly as a line of credit.  For example, say you are living on a fixed income.  Then, a health issue arises that requires monthly bills to be paid, which are not covered by your insurance.  If you have no liquid assets set-aside to cover these costs, then you could take out a reverse mortgage on your house and receive a tax-free monthly (or single) payment to match your expenses.  Of course, the amount you are eligible for will obviously depend on such factors as the value of your home, current interest rates, your age and local lending limits.  A key advantage that these programs offer is that there is no medical underwriting of any kind involved, so any medical conditions that you may have will not prevent you from qualifying.  There are also no limitations on how the proceeds from a reverse mortgage can be spent; the funds can be used for anything.  If you are looking for an additional source of funds and would like to know more about whether a reverse mortgage is right for you, you can get no obligation quites form reverse mortgage lenders in your area.  

Note that as with any mortgage, there are points and other costs associated with the origination of the mortgage.  Interest rates for reverse mortgages generally are higher than traditional home mortgages and home equity loans. Additionally, fees and expenses associated with reverse mortgages are also higher than fees typically applied to traditional mortgages – sometimes as high as 4% to 8% of the mortgage loan amount. In addition, while typically there are no taxes on the proceeds of a reverse mortgage, the income or lump sum received could impact eligibility for various state and federal benefits, including Medicaid. Further, depending on the laws of a state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if a homeowner had a health emergency and needed to enter a nursing home. Reverse mortgages should not be used to speculate with home equity.

Before you obtain a reverse mortgage, federal rules require that you have an education session with a government appointed consultant to make sure you understand all of the terms and so that you can ask your questions to an impartial source.

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In economic downturns everyone tends to tighten their budgets, and that includes retirees. In fact you may find you’re actually saving in retirement after paying your regular expenses. So where should you put this ‘extra’ savings as a retiree?

You may tend to just put it into your retirement savings into a bank account. But that makes your money vulnerable to inflation and unable to participate in market upturns. Its earnings are also taxed yearly - you may as well put it under the mattress.

Better to make it work toward ensuring more for you in the future. At 65 you statistically have some 20 years of remaining life expectancy. Long before that time elapses, both inflation and economic upturns will affect your holdings.

Presuming that you’ve stashed anywhere from 1 to 2 years of easy-to-access emergency money, you should put your ‘extra’ retirement savings into investments of a longer time horizon. Here, you’re looking for equity growth – both to offset the effects of inflation and further capitalize on the eventual rebound of the economy and the stock market.

Be sure to diversify your retirement savings among a variety of equity portfolios. Although you may invest some in funds that cater to large capitalization stocks, you should try to include real estate investments, international stocks, emerging markets, and smaller U.S. stocks.

These investments will reside in your ‘taxable’ accounts since they come from investment earnings and not work earnings. And as equity-based investments, their annual earnings should be small, since you’re investing for ‘growth in principal’. They may not ‘move’ for a while, but remember, you’ve already proven you don’t need this money. 

Consider this money outside your normal portfolio arranged according to your risk profile and income requirements. This way you can afford to risk a small portion of retirement savings and wait sufficient time for it to bloom.

For the most conservative investors, consider index-linked CDs.  These are FDIC insured CDs that pay interest based on increases in the stock market.  If the market falls, you original principal is guaranteed.  If the market rises, your index-linked CD increases in value.  Similar to this alternative, are equity-indexed annuities.  The same principals hold.  If the market declines, the issuing insurance company guarantees your principal.  If the market advances, your annuity balance participates in the gain.  Consult a retirement advisor to learn about your options for saving in retirement.

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Everyone whose work earnings make him or her eligible for Social Security benefits (i.e. income) receives his full Social Security benefit when he reaches his full retirement age (FRA). You can retire as early as 62 but your benefits will be permanently reduced by about 25% from the full benefits you’d get at your FRA. Waiting longer than your FRA to begin receiving Social Security benefits increases your benefits. Waiting to age 70, will increase them by about 32%.

A spouse (i.e. a married person) always has the option of taking the larger of her own working benefit or a ‘marriage entitlement’ benefit that’s based on the benefit her husband collects (assuming the husband was the higher earner in this example).

A spouse’s benefits while husband is alive
Since men generally have worked and earned more, it’s their wives that are in the position of collecting the larger of their own working Social Security benefits or their social security spouse’s benefit.

 A wife’s spousal benefit can be as high as 50% of her husband’s full retirement benefit. To receive this, she must wait for her own FRA and he must do the same.

If he retires early, but she waits for her FRA, she still get 50% of her husband’s benefit – but his is less because his benefit is reduce due to his early retirement. If he retired at 62, his benefit would be reduced by about 25% from his FRA benefit.

If she retires early at 62, and he waits for his FRA, her spousal benefit will be a reduced about 30% below whatever her 50% spousal benefit would have been. 

A surviving spouse’s benefit
A surviving spouse is entitled to the greater of 100% of the deceased spouse’s social security benefits or his/her own working benefit. As stated above, this option is more typical for a surviving wife to make.

Here, the wife’s 100% of her husband’s benefit is affected by what he actually received. So if he retired early, then her 100% benefit will be smaller to the same extent that his benefit was reduced for early retirement. Her 100% benefit would increase if he delays his retirement to age 70.

So a married man’s decision when to collect Social Security has direct implications not only on how much he’ll receive in Social Security benefits, but how much his wife and survivor will receive. But remember, there’s more to life than financial gain, men don’t live as long as women; they deserve some decent retirement time too.

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Recent economic conditions have hit many equities hard. Their lowered values have lowered the value of the IRA they’re in. Since this year’s MRD is based on possibly a higher IRA value at the end of previous year, you will pay tax on an irritatingly large MRD for 2008.  To mitigate this, IRS has waived the 2009 MRD requirement altogether. 

Equities – such as stocks – you bought in your IRA have a ‘zero’ tax basis. Whatever value you take out for your IRA distributions is taxed at ordinary income tax rates. And that includes all gains those equities made. Also,  there’s no deduction for any loss within an IRA.

Keeping those depressed equities in your IRA for a possible comeback within a year or two will have you paying ordinary income tax rates when you take them out in the future for both their value and any gains. That’s a bad tax consequence of IRAs for appreciating equities.

Take an In Kind IRA distribution for reduced taxation

But if you expect those equities to appreciate, you have to withdraw your MRD, and you don’t need the cash for living, you can capitalize on that future growth at a much lower capital gains tax rate.  Do this by taking an ‘in kind’ IRA distribution.

You take an ‘in kind’ IRA distribution by requesting your IRA custodian to transfer the stock directly from your IRA account to a taxable account without cashing them in. Keep records on the value of that stock when it’s transferred. It’s on that value that you’ll have to pay ordinary income tax as an IRA distribution. You’ll have to come up with cash elsewhere to pay this tax.

But that stock value now becomes the basis of that transferred stock. If the stock appreciates three better tax consequences occur:

• Any gain will be subject to the low long term capital gains tax – and that’s for gain above its new basis. 
• You’ll not have to pay any tax on any gain until you wish to sell it.
• Dividends will be tax yearly – but if they’re qualified dividends, you pay at no more than the 15% rate (current rate in effect for 2009 and 2010)

Lastly, if the equities fall further and you decide their not worth holding for the future, you’ll be able to take a capital loss deduction and use it to offset other tax on other income or IRA distributions.

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If you are like many people in the United States, the chances are that you have had several jobs over your working life and, as a result, still have a number of 401K plans with different former employers. Or perhaps you have recently retired, but are not yet ready to cash in your 401K plan(s). Whatever your individual circumstances may be, you should be aware that your 401K plans could actually be costing you money.

Under the current laws, not only are the companies administering your 401K allowed to charge maintenance and service fees, but they are also not required to inform you what those maintenance and services fees are. Some insurance companies and stock brokerage houses are charging as much as 4% or 5% per year off the top for the plans they administer, which can significantly decrease the annual yield and value of your plan. (There are also fees and charges associated with maintaining IRA accounts, and generally there will be management or transaction fees associated with most products.)

Specific fees that are considered to be “hidden” are:
 Trading costs, commissions between fund managers and brokerage firms
 Soft dollar “excess commissions” paid to brokerages pursuant to Securities
 Exchange Commission (“SEC”) rule 28(e)
 Sub-shareholder (participant) servicing fees - called “sub-transfer agent fees”
 (“Sub-TA”)
 Account distribution (sales) based 12(b)-1 fees
 Account servicing based 12(b)-1 fees
 Unitized variable annuity wrap fees
 Variable annuity mortality costs
 “On-the-fly” pass through fees
 Retail versions of institutional funds (i.e. funds that could be purchased at a lower price but are not, due to fiduciary ignorance)

Unfortunately, managers at many companies have signed on with 401k sponsors and simply do not understand the fees involved.  Since the fees are not paid by the company, bu rather by you and the other participants, they have small motivation to look hard at the fees.  In fact, a study by Spectrem Group showed that most plan sponsors don’t know what they pay. 

So unless you ask and thoroughly read the prospectus and make sure onerous fees are not being levied against your account, it’s best to do an IRA rollover and not leave your funds in a high priced qualified plan.

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We’re familiar with the effects of inflation. Our dollars just don’t buy as much as they used to. Too much ‘easy money’ from too much credit puts more dollars into everyone’s hands so each dollar is worth less than before. So too many dollars are chasing too few goods and the prices of goods are bid up. In this typical inflationary environment, retirement investing rules are to get rid of cash and hold hard assets like real estate.

But when recession occurs, everyone becomes afraid of consuming. Businesses feel the pinch and people lose jobs. Government may try to ‘prime the pump’ by offering and instigating low interest rates. That reduces the cost of credit and hopefully to get people to begin borrowing and ‘consuming more’.

But if the turn down is too severe, very few people will be enticed to spend money. The money supply actually contracts. The results in a low demand to buy most things and can force prices down. And deflation is the general decrease in the prices of goods. Your dollars are worth more!  Rather than get rid of dollars, you want to own them and convert them selectively to assets that have fallen in value (real estate, stocks, etc).

Most retirees have no job to lose. They’re living off Social Security, pensions and their investment earnings. Most of this  retirement income may be fixed income.  Those in such a circumstance can actually benefit from deflation – mostly from the benefit of lower prices for things.

But under deflation, dollars become more valuable and debt – i.e. owing a fixed amount of dollars – becomes more of a burden. So retirees should reduce the cost of their debt by reducing payments or restructuring.

As deflation sets in you’re paying off debt in more expensive dollars. So any way to reduce the dollars you must commit to debt payments is beneficial.

Restructure your debt payments. With recessions comes falling interest rates. Take advantage of lower interest rates to restructure debt payments you can’t pay off quickly.

Refinance your home. If you have a mortgage, refinance at lower interest rate to cut your monthly costs – or to pay it off over a reduced time period.

Since the value of cash is increasing, holding it will increase your wealth – but only during deflation. Aside from preserving your emergency funds, you’ll want to hold dollars for retirement investment opportunities at low prices.

If you do have extra cash, stay aware of overly depressed investment prices and commodity prices (oil and gold)that will recover after the recession ends and present low risk retirement investing opportunities. Real estate investments – especially condos – are a typical case. It may even be worth a small remortgage of your paid off house for some investments (this strategy is not suitable for everyone as any borrowing will incur a fixed payment commitment while the return on investments is not assured).

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Generally, your IRA and or company 401(k) distributions are taxed as ordinary income. That’s because you funded them with tax-deductible contributions and all the earnings of these contributions have been tax-deferred. So nothing has been taxed. Taking a distribution before turning 59½ will add a 10% penalty tax to the income tax.

Nevertheless, you may have made some ‘after-tax’ contributions to them, and those – not their earnings – will come out tax free. So let’s see how this to handle these.

Taxable and non taxable distributions for company-administered plans such as a 401(k)
This is pretty easy because it’s your employer who is responsible for tracking both your tax deductible and after-tax contributions to the plan. They’ll report those amounts to you, either on your statements or on a 1099-R when you take a distribution from the plan. 

IRA distribution
You’re the administrator of your IRA. So keeping track of after-tax contributions is your job. That’s done on IRS Form 8606 each year you make an after-tax contribution and each year you take an IRA distribution.

This form – each time it’s filed - carries forward the total of prior year after-tax contributions and adds them to any current year contribution. It also formulates the non-taxable portion of any distribution you take in the year. And, of course subtracts out that amount from the total after-tax contributions among your IRAs.  Normally, form 8606 is attached to your tax return. 

The non-taxable portion of your IRA distributionsduring the year is the ratio of all your after-tax contributions (from your latest Form 8606) divided by the total value of your IRAs. No, you don’t get to take out just the ‘tax-free’ part!  Each time you take an IRA distribution, part is taxable, part is return of after tax money (not taxable).

What if you forgot to file your Form 8606 over the years? Just get the form and its instructions; it’ll give you some suggestions on documentation you can use to substantiate your prior after-tax contribution amounts.  If you think the amount of after tax contributions you have forgot to document is significant, then get help form a tax professional so that you don’t need to pay tax twice when you take distributions.

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When it comes time to tap your savings and investment accounts, investors often ignore which source should come first for retirement distributions. In general, many experts often advise investors to draw from their taxable accounts first, then tap qualified accounts such as IRAs and 401(k)s further down the road.

There is a logical reason for this – prolonging withdrawals from your qualified accounts or tax sheletered accounts gives these assets additional time to grow with the benefit of tax-deferral. There are other reasons why this strategy for retirement distributions could be efficient from a federal income tax perspective.

Let’s say that you have three sources of investment funds: a regular taxable account (which could hold individual stocks, bonds, or mutual funds,) and two qualified accounts: a traditional IRA and a Roth IRA. What happens if you tap your traditional IRA? First, all retirement distreibutions from a traditional IRA are taxed at your current ordinary income tax rate. Second, a 10% federal income tax penalty will usually apply to traditional IRA withdrawals taken prior to age 59½ (subject to a few limited exceptions explained in IRS Publication 590, among the exceptions include but are not limited to withdrawals for qualified higher education expenses, first-time home buyer, and medical insurance premiums for certain unemployed taxpayers, and withdrawals taken by disabled taxpayers).

What about retirement distributions from a Roth IRA? First, your principal contributions from the Roth can be withdrawn without occurring any tax. Additionally, any withdrawals from your Roth are first treated as being taken from your principal. Should you have to tap into your earnings, these withdrawals are subject to ordinary income taxes at your respective tax rate. And if you are less than 59 ½ years of age “or” you do not hold the Roth for more than five years, the distribution could also be subject to the 10% federal income tax penalty. 

However, by leaving the money in the Traditional and Roth IRAs, you have the opportunity to accumulate tax-deferred investment growth over the life of both the owner and the beneficiaries. Assuming the age and holding period requirements are met, all Roth retirement distributions also come out free of future federal income taxes to the account owner as well as the beneficiaries.

What if you tap your taxable account first? First, you will owe taxes on any capital gains you realize from the sale of investments in this portfolio. Assuming you have held the asset for more than one-year, your rate will be lower than your current income tax rate (0% for taxpayers in 10-15% brackets; 15% for all tax brackets exceeding 15%). You might also be able to offset any capital gains with capital losses, which can soften the blow of your annual tax bill. 

As you gradually tap your taxable account, the distributions you receive from these investments will slowly recede as well, thus lowering your tax burden from dividends and capital gains paid to you. Moreover, your qualified accounts could potentially have longer time to grow with the power of tax-deferral, which could enhance the value of your qualified retirement funds.

Eventually, you will have to take required minimum distributions from your traditional IRA, once you reach age 70½. Although these retirement distributions will be taxed at your ordinary income tax rate, you could be in a lower tax bracket by then. As previously mentioned, these distributions are taken, in many cases, over the life expectancies of the owner and the beneficiaries. On the other hand, traditional IRAs do not receive a step-up in income-tax basis when they are transferred to younger beneficiaries at the owner’s death. Although there is something to be said about the power of deferring taxes, one should also consider future income tax consequences to younger family members before making a decision.  

Assuming you have assets in Roth IRAs, you should know that minimum distributions are not required. In view of this and the fact that retirement distriubutions will come out free of federal income taxes (assuming the age and holding period rules are met), you may want to consider your Roth assets as your source of last resort.   
Deciding which account to tap first depends on your financial and tax situation now and during your retirement years.   In general, leave your IRA and qualified accounts to grow but don’t proceed with this advice until you have had a tax consultant or retirement advisor confirm.

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